July 1 (Bloomberg) -- Romania’s central bank refrained from cutting its benchmark interest rate, saying there’s a risk of inflation picking up in the medium term.
Policy makers left the key rate at a record-low 3.5 percent for a third meeting, according to an e-mailed statement today. Ten of 11 economists in a Bloomberg survey predicted the move, while one forecast a cut to 3.25 percent. The central bank reduced reserve requirements to 16 percent from 18 percent for foreign-currency liabilities and maintained those for leu deposits at 12 percent.
“The key rate was well positioned and we are now in the process of considering the stance,” Governor Mugur Isarescu said in Bucharest today. “The inflation trend for this year is certainly below the one we estimated, we even see a significant decline, but for next year and beyond it’s not yet consolidated.”
With inflation at a quarter-century low and economic growth the fastest in the European Union in the first quarter, policy makers halted an easing cycle in March after 175 basis points of rate cuts since July. Tax increases may fan inflation to 3.3 percent by year-end, according to the central bank, bringing price growth close to the upper bound of its target corridor.
“The high level of uncertainty with regard to the dynamics of food prices stemming from the impossibility of forecasting weather conditions in the summer is the main reason for the central bank to keep the key rate unchanged,” analysts at Raiffeisen Bank Romania SA including Ionut Dumitru said in a note after the decision.
The leu weakened 0.1 percent to 4.3882 per euro at 5:35 p.m. in Bucharest, according to data compiled by Bloomberg. It’s 1.5 percent stronger this year.
Once the cut in reserve requirements enters into force on July 23, commercial banks will receive about 500 million euros ($684 million) in funds they can use to repay debt to foreign parents or to extend foreign currency loans, according to Isarescu.
A Eurobond sale by the Finance Ministry to attract part of the funds into Romanian debt would be a “good idea,” Isarescu said, adding that such a plan must take into consideration the 4 billion-euro buffer the ministry currently has.
The central bank is seeking to keep consumer-price growth between 1.5 percent and 3.5 percent this year. It forecasts inflation at 1.4 percent at the end of this quarter from 0.9 percent in May. June data will be released by the country’s National Statistics Institute on July 10.
Romanian policy makers are also concerned that negative deposit rates in the euro area will reduce savings as “similar policies to discourage savings in Romania would be inefficient and dangerous,” according to Isarescu.
“The right dosage of monetary-policy tools is important and we noticed that in such periods, liquidity management is much more efficient than interest rates,” Isarescu said.
The central bank has a managed-float policy for the leu and never comments on market interventions.
Romania’s economy grew 3.8 percent from a year earlier in the first quarter, boosted by industry and exports.
“The key rate could be cut later this year if inflationary pressures remain subdued,” Radu Craciun, chief economist at Erste Group Bank AG’s Romanian unit, said in a note before the announcement.
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